By design, a blockchain is resistant to modification of the data. It is "an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way".[7] For use as a distributed ledger, a blockchain is typically managed by a peer-to-peer network collectively adhering to a protocol for inter-node communication and validating new blocks. Once recorded, the data in any given block cannot be altered retroactively without alteration of all subsequent blocks, which requires consensus of the network majority. Although blockchain records are not unalterable, blockchains may be considered secure by design and exemplify a distributed computing system with high Byzantine fault tolerance. Decentralized consensus has therefore been claimed with a blockchain.[8]

Blockchain was invented by a person (or group of people) using the name Satoshi Nakamoto in 2008 to serve as the public transaction ledger of the cryptocurrencybitcoin.[1] The identity of Satoshi Nakamoto is unknown. The invention of the blockchain for bitcoin made it the first digital currency to solve the double-spending problem without the need of a trusted authority or central server. The bitcoin design has inspired other applications,[1][3] and blockchains which are readable by the public are widely used by cryptocurrencies. Blockchain is considered a type of payment rail.[9] Private blockchains have been proposed for business use. Sources such as Computerworld called the marketing of such blockchains without a proper security model "snake oil".[10]

History

Bitcoin transactions (January 2009 – September 2017)

The first work on a cryptographically secured chain of blocks was described in 1991 by Stuart Haber and W. Scott Stornetta.[6][11] They wanted to implement a system where document timestamps could not be tampered with. In 1992, Bayer, Haber and Stornetta incorporated Merkle trees to the design, which improved its efficiency by allowing several document certificates to be collected into one block.[6][12]

The first blockchain was conceptualized by a person (or group of people) known as Satoshi Nakamoto in 2008. Nakamoto improved the design in an important way using a Hashcash-like method to add blocks to the chain without requiring them to be signed by a trusted party.[6] The design was implemented the following year by Nakamoto as a core component of the cryptocurrency bitcoin, where it serves as the public ledger for all transactions on the network.[1]

In August 2014, the bitcoin blockchain file size, containing records of all transactions that have occurred on the network, reached 20 GB (gigabytes).[13] In January 2015, the size had grown to almost 30 GB, and from January 2016 to January 2017, the bitcoin blockchain grew from 50 GB to 100 GB in size.

The words block and chain were used separately in Satoshi Nakamoto's original paper, but were eventually popularized as a single word, blockchain, by 2016.

Smart contracts which run on a blockchain, for example ones which "creat[e] invoices that pay themselves when a shipment arrives or share certificates which automatically send their owners dividends if profits reach a certain level."[1] require an off-chain oracle to access any "external data or events based on time or market conditions [that need] to interact with the blockchain."[14]

In May 2018, Gartner found that only 1% of CIOs indicated any kind of blockchain adoption within their organisations, and only 8% of CIOs were in the short-term 'planning or [looking at] active experimentation with blockchain'.[16]

Structure

A blockchain is a decentralized, distributed and public digital ledger that is used to record transactions across many computers so that any involved record cannot be altered retroactively, without the alteration of all subsequent blocks.[1][17] This allows the participants to verify and audit transactions independently and relatively inexpensively.[18] A blockchain database is managed autonomously using a peer-to-peer network and a distributed timestamping server. They are authenticated by mass collaboration powered by collectiveself-interests.[19] Such a design facilitates robustworkflow where participants' uncertainty regarding data security is marginal. The use of a blockchain removes the characteristic of infinite reproducibility from a digital asset. It confirms that each unit of value was transferred only once, solving the long-standing problem of double spending. A blockchain has been described as a value-exchange protocol.[20] A blockchain can maintain title rights because, when properly set up to detail the exchange agreement, it provides a record that compels offer and acceptance.

Blocks

Blocks hold batches of valid transactions that are hashed and encoded into a Merkle tree.[1] Each block includes the cryptographic hash of the prior block in the blockchain, linking the two. The linked blocks form a chain.[1] This iterative process confirms the integrity of the previous block, all the way back to the original genesis block.[21]

Sometimes separate blocks can be produced concurrently, creating a temporary fork. In addition to a secure hash-based history, any blockchain has a specified algorithm for scoring different versions of the history so that one with a higher value can be selected over others. Blocks not selected for inclusion in the chain are called orphan blocks.[21] Peers supporting the database have different versions of the history from time to time. They keep only the highest-scoring version of the database known to them. Whenever a peer receives a higher-scoring version (usually the old version with a single new block added) they extend or overwrite their own database and retransmit the improvement to their peers. There is never an absolute guarantee that any particular entry will remain in the best version of the history forever. Blockchains are typically built to add the score of new blocks onto old blocks and are given incentives to extend with new blocks rather than overwrite old blocks. Therefore, the probability of an entry becoming superseded decreases exponentially[22] as more blocks are built on top of it, eventually becoming very low.[1][23]:ch. 08[24] For example, bitcoin uses a proof-of-work system, where the chain with the most cumulative proof-of-work is considered the valid one by the network. There are a number of methods that can be used to demonstrate a sufficient level of computation. Within a blockchain the computation is carried out redundantly rather than in the traditional segregated and parallel manner.[25]

Block time

The block time is the average time it takes for the network to generate one extra block in the blockchain. Some blockchains create a new block as frequently as every five seconds.[26] By the time of block completion, the included data becomes verifiable. In cryptocurrency, this is practically when the transaction takes place, so a shorter block time means faster transactions. The block time for Ethereum is set to between 14 and 15 seconds, while for bitcoin it is 10 minutes.[27]

Hard forks

A hard fork is a rule change such that the software validating according to the old rules will see the blocks produced according to the new rules as invalid. In case of a hard fork, all nodes meant to work in accordance with the new rules need to upgrade their software.

If one group of nodes continues to use the old software while the other nodes use the new software, a split can occur. For example, Ethereum has hard-forked to "make whole" the investors in The DAO, which had been hacked by exploiting a vulnerability in its code. In this case, the fork resulted in a split creating Ethereum and Ethereum Classic chains. In 2014 the Nxt community was asked to consider a hard fork that would have led to a rollback of the blockchain records to mitigate the effects of a theft of 50 million NXT from a major cryptocurrency exchange. The hard fork proposal was rejected, and some of the funds were recovered after negotiations and ransom payment. Alternatively, to prevent a permanent split, a majority of nodes using the new software may return to the old rules, as was the case of bitcoin split on 12 March 2013.[28]

Peer-to-peer blockchain networks lack centralized points of vulnerability that computer crackers can exploit; likewise, it has no central point of failure. Blockchain security methods include the use of public-key cryptography.[4]:5 A public key (a long, random-looking string of numbers) is an address on the blockchain. Value tokens sent across the network are recorded as belonging to that address. A private key is like a password that gives its owner access to their digital assets or the means to otherwise interact with the various capabilities that blockchains now support. Data stored on the blockchain is generally considered incorruptible.[1]

Every node in a decentralized system has a copy of the blockchain. Data quality is maintained by massive database replication[8] and computational trust. No centralized "official" copy exists and no user is "trusted" more than any other.[4] Transactions are broadcast to the network using software. Messages are delivered on a best-effort basis. Mining nodes validate transactions,[21] add them to the block they are building, and then broadcast the completed block to other nodes.[23]:ch. 08 Blockchains use various time-stamping schemes, such as proof-of-work, to serialize changes.[29] Alternative consensus methods include proof-of-stake.[21] Growth of a decentralized blockchain is accompanied by the risk of centralization because the computer resources required to process larger amounts of data become more expensive.[30]

Openness

Open blockchains are more user-friendly than some traditional ownership records, which, while open to the public, still require physical access to view. Because all early blockchains were permissionless, controversy has arisen over the blockchain definition. An issue in this ongoing debate is whether a private system with verifiers tasked and authorized (permissioned) by a central authority should be considered a blockchain.[31][32][33][34][35] Proponents of permissioned or private chains argue that the term "blockchain" may be applied to any data structure that batches data into time-stamped blocks. These blockchains serve as a distributed version of multiversion concurrency control (MVCC) in databases.[36] Just as MVCC prevents two transactions from concurrently modifying a single object in a database, blockchains prevent two transactions from spending the same single output in a blockchain.[37]:30–31 Opponents say that permissioned systems resemble traditional corporate databases, not supporting decentralized data verification, and that such systems are not hardened against operator tampering and revision.[31][33] Nikolai Hampton of Computerworld said that "many in-house blockchain solutions will be nothing more than cumbersome databases," and "without a clear security model, proprietary blockchains should be eyed with suspicion."[10][38]

Permissionless

The great advantage to an open, permissionless, or public, blockchain network is that guarding against bad actors is not required and no access control is needed.[22] This means that applications can be added to the network without the approval or trust of others, using the blockchain as a transport layer.[22]

Bitcoin and other cryptocurrencies currently secure their blockchain by requiring new entries to include a proof of work. To prolong the blockchain, bitcoin uses Hashcash puzzles. While Hashcash was designed in 1997 by Adam Back, the original idea was first proposed by Cynthia Dwork and Moni Naor and Eli Ponyatovski in their 1992 paper "Pricing via Processing or Combatting Junk Mail".

Financial companies have not prioritised decentralized blockchains.[39]
In 2016, venture capital investment for blockchain-related projects was weakening in the USA but increasing in China.[40] Bitcoin and many other cryptocurrencies use open (public) blockchains. As of April 2018[update], bitcoin has the highest market capitalization.

Permissioned (private) blockchain

Permissioned blockchains use an access control layer to govern who has access to the network.[41] In contrast to public blockchain networks, validators on private blockchain networks are vetted by the network owner. They do not rely on anonymous nodes to validate transactions nor do they benefit from the network effect.[42][better source needed] Permissioned blockchains can also go by the name of 'consortium' blockchains.[43][better source needed]

Disadvantages of private blockchain

Nikolai Hampton pointed out in Computerworld that "There is also no need for a '51 percent' attack on a private blockchain, as the private blockchain (most likely) already controls 100 percent of all block creation resources. If you could attack or damage the blockchain creation tools on a private corporate server, you could effectively control 100 percent of their network and alter transactions however you wished."[10] This has a set of particularly profound adverse implications during a financial crisis or debt crisis like the financial crisis of 2007–08, where politically powerful actors may make decisions that favor some groups at the expense of others,[44][45] and "the bitcoin blockchain is protected by the massive group mining effort. It's unlikely that any private blockchain will try to protect records using gigawatts of computing power — it's time consuming and expensive."[10] He also said, "Within a private blockchain there is also no 'race'; there's no incentive to use more power or discover blocks faster than competitors. This means that many in-house blockchain solutions will be nothing more than cumbersome databases."[10]

Blockchain analysis

The analysis of public blockchains has become increasingly important with the popularity of bitcoin, Ethereum, litecoin and other cryptocurrencies.[46] A blockchain, if it is public, provides anyone who wants access to observe and analyse the chain data, given one has the know-how. The process of understanding and accessing the flow of crypto has been an issue for many cryptocurrencies, crypto-exchanges and banks.[47][better source needed] The reason for this is accusations of blockchain enabled cryptocurrencies enabling illicit dark market trade of drugs, weapons, money laundering etc.[48] A common belief has been that cryptocurrency is private and untraceable, thus leading many actors to use it for illegal purposes.[49][better source needed][50][better source needed] This is changing and now specialised tech-companies provide blockchain tracking services, making crypto exchanges, law-enforcement and banks more aware of what is happening with crypto funds and fiat crypto exchanges. An example of this was the bitcoin big bang visualisation, revealing many links between legitimate and illegal crypto actors.[51][better source needed][52][better source needed][53][better source needed] The development, some argue, has lead criminals to prioritise use of news cryptos such as Monero.[54][55][56] The question is about public accessibility of blockchain data and the personal privacy of the very same data. It is a key debate in cryptocurrency and ultimately in blockchain.[57][58][59][60]

The argument on the one side is that blockchain and a cryptocurrency like bitcoin should inherently be completely public but anonymous. The argument on the other hand is that analysis of the public blockchain should be paired with banks and crypto-exchanges KYC-processes, which is increasingly being enforced by regulators, to enable the flagging of illicit actors.[61] The logic is that by ridding cryptos of the links to illegal dark market trade they will be legitimised, and that this can be done while maintaining privacy but not anonymity, as the latter was never inherent in the design of the bitcoin blockchain.[62][63][64][65]

As of 2016[update], some observers remain skeptical. Steve Wilson, of Constellation Research, believes the technology has been hyped with unrealistic claims.[66] To mitigate risk, businesses are reluctant to place blockchain at the core of the business structure.[67]

Cryptocurrencies

Most cryptocurrencies use blockchain technology to record transactions. For example, the bitcoin network and Ethereum network are both based on blockchain. On 8 May 2018 Facebook confirmed that it is opening a new blockchain group[68] which will be headed by David Marcus who previously was in charge of Messenger. According to The Verge Facebook is planning to launch its own cryptocurrency for facilitating payments on the platform.[69]

Smart contracts

Blockchain-based smart contracts are proposed contracts that could be partially or fully executed or enforced without human interaction.[70] One of the main objectives of a smart contract is automatedescrow. An IMF staff discussion reported that smart contracts based on blockchain technology might reduce moral hazards and optimize the use of contracts in general. But "no viable smart contract systems have yet emerged." Due to the lack of widespread use their legal status is unclear.[71]

Financial services

Banks are interested in this technology because it has potential to speed up back office settlement systems.[76]

Banks such as UBS are opening new research labs dedicated to blockchain technology in order to explore how blockchain can be used in financial services to increase efficiency and reduce costs.[77][78]

Berenberg, a German bank, believes that blockchain is an "overhyped technology" that has had a large number of "proofs of concept", but still has major challenges, and very few success stories.[79]

Blockchain with video games

Some video games are based on blockchain technology. The first such game, Huntercoin, was released in February 2014.[80][unreliable source] Another blockchain game is CryptoKitties, launched in November 2017.[81] The game made headlines in December 2017 when a cryptokitty character - an-in game virtual pet - was sold for US$100,000.[82][irrelevant citation]CryptoKitties illustrated scalability problems for games on Ethereum when it created significant congestion on the Ethereum network with about 30% of all Ethereum transactions being for the game.[83][irrelevant citation]

Cryptokitties also demonstrated how blockchains can be used to catalog game assets (digital assets).[84]

The Blockchain Game Alliance was formed in September 2018 to explore alternative uses of blockchains in video gaming with support of Ubisoft and Fig, among others.[85]

Blockchain in space

Several blockchain companies have taken blockchain to space.[90] Spacechain launched two nanosatellite-based blockchain nodes into orbit in February and October 2018. Its first use case is decentralized storage of data and files in space,[91] but the end goal is to reduce reliance on big corporations like Google and Facebook, who also explore ways to bring internet to everyone through satellites in space.[92]

Other uses

Blockchain technology can be used to create a permanent, public, transparent ledger system for compiling data on sales, tracking digital use and payments to content creators, such as wireless users[93] or musicians.[94] In 2017, IBM partnered with ASCAP and PRS for Music to adopt blockchain technology in music distribution.[95]Imogen Heap's Mycelia service has also been proposed as blockchain-based alternative "that gives artists more control over how their songs and associated data circulate among fans and other musicians."[96][97]

Hyperledger is a cross-industry collaborative effort from the Linux Foundation to support blockchain-based distributed ledgers, with projects under this initiative including Hyperledger Burrow (by Monax) and Hyperledger Fabric (spearheaded by IBM)[103]

Quorum – a permissionable private blockchain by JPMorgan Chase with private storage, used for contract applications[104]

Some of the largest, most known public blockchains are the bitcoin blockchain and the Ethereum blockchain.

Private blockchains

A private blockchain is permissioned.[41] One cannot join it unless invited by the network administrators. Participant and validator access is restricted.

This type of blockchains can be considered a middle-ground for companies that are interested in the blockchain technology in general but are not comfortable with a level of control offered by public networks. Typically, they seek to incorporate blockchain into their accounting and record-keeping procedures without sacrificing autonomy and running the risk of exposing sensitive data to the public internet.[citation needed]

Consortium blockchains

A consortium blockchain is often said to be semi-decentralized. It, too, is permissioned but instead of a single organization controlling it, a number of companies might each operate a node on such a network. The administrators of a consortium chain restrict users' reading rights as they see fit and only allow a limited set of trusted nodes to execute a consensus protocol.[citation needed]

Hybrid blockchains

A hybrid blockchain[107] simply explained is a combination between different characteristics both public and private blockchains have by design. It allows to determine what information stays private and what information is made public. Further decentralization in relation to primarily centralized private blockchains can be achieved in various ways. Instead of keeping transactions inside their own network of community run or private nodes, the hash (with or without payload) can be posted on completely decentralized blockchains such as bitcoin. Dragonchain uses Interchain[108] to host transactions on other blockchains. This allows users to operate on different blockchains, where they can selectively share data or business logic. Other blockchains like Wanchain use interoperability mechanisms such as bridges.[109][110] By submitting the hash of a transaction (with or without the sensitive business logic) on public blockchains like bitcoin or Ethereum, some of the privacy and blockchain concerns are resolved, as no personal identifiable information is stored on a public blockchain. Depending on the hybrid blockchain its architecture, multicloud solutions allow to store data in compliance with General Data Protection Regulation and other geographical limitations while also leveraging bitcoin's global hashpower to decentralize transactions.

Academic research

In October 2014, the MIT Bitcoin Club, with funding from MIT alumni, provided undergraduate students at the Massachusetts Institute of Technology access to $100 of bitcoin. The adoption rates, as studied by Catalini and Tucker (2016), revealed that when people who typically adopt technologies early are given delayed access, they tend to reject the technology.[111]

The journal encourages authors to digitally sign a file hash of submitted papers, which will then be timestamped into the bitcoin blockchain. Authors are also asked to include a personal bitcoin address in the first page of their papers.[120]

^Trottier, Leo (18 June 2016). "original-bitcoin"(self-published code collection). github. Archived from the original on 17 April 2016. Retrieved 18 June 2016. This is a historical repository of Satoshi Nakamoto's original bit coin sourcecode

^Iansiti, Marco; Lakhani, Karim R. (January 2017). "The Truth About Blockchain". Harvard Business Review. Harvard University. Archived from the original on 18 January 2017. Retrieved 17 January 2017. The technology at the heart of bitcoin and other virtual currencies, blockchain is an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way.

^Kopfstein, Janus (12 December 2013). "The Mission to Decentralize the Internet". The New Yorker. Archived from the original on 31 December 2014. Retrieved 30 December 2014. The network's 'nodes' — users running the bitcoin software on their computers — collectively check the integrity of other nodes to ensure that no one spends the same coins twice. All transactions are published on a shared public ledger, called the 'block chain.'

^Epstein, Jim (6 May 2016). "Is Blockchain Technology a Trojan Horse Behind Wall Street's Walled Garden?". Reason. Archived from the original on 8 July 2016. Retrieved 29 June 2016. mainstream misgivings about working with a system that's open for anyone to use. Many banks are partnering with companies building so-called private blockchains that mimic some aspects of Bitcoin's architecture except they're designed to be closed off and accessible only to chosen parties. ... [but some believe] that open and permission-less blockchains will ultimately prevail even in the banking sector simply because they're more efficient.

^Redrup, Yolanda (29 June 2016). "ANZ backs private blockchain, but won't go public". Australia Financial Review. Archived from the original on 3 July 2016. Retrieved 7 July 2016. Blockchain networks can be either public or private. Public blockchains have many users and there are no controls over who can read, upload or delete the data and there are an unknown number of pseudonymous participants. In comparison, private blockchains also have multiple data sets, but there are controls in place over who can edit data and there are a known number of participants.

^Shah, Rakesh (1 March 2018). "How Can The Banking Sector Leverage Blockchain Technology?". PostBox Communications. PostBox Communications Blog. Archived from the original on 17 March 2018. Banks preferably have a notable interest in utilizing Blockchain Technology because it is a great source to avoid fraudulent transactions. Blockchain is considered hassle free, because of the extra level of security it offers.